In re Polycom, Inc. Derivative Litig.

• Decision Date: 13 January 2015
• Docket Number: Case No. 13–CV–03880 SC
• Citation: 78 F.Supp.3d 1006
• Court: U.S. District Court — Northern District of California
• Parties: In re: Polycom, Inc. Derivative Litigation This Order Relates To: All Actions

78 F.Supp.3d 1006

In re: Polycom, Inc. Derivative Litigation This Order Relates To: All Actions

Case No. 13–CV–03880 SC

United States District Court, N.D. California.

Signed January 13, 2015

Nathan R. Hamler, Shawn Eric Fields, Frank James Johnson, Johnson & Weaver, LLP, San Diego, CA, for Plaintiffs.

Paul T. Friedman, Philip T. Besirof, Morrison & Foerster LLP, San Francisco, CA, Keith E. Eggleton, Kelley Moohr Kinney, Wilson Sonsini Goodrich & Rosati A Professional Corporation, Palo Alto, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS

Samuel Conti, UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

Now before the Court are motions to dismiss Plaintiffs' Verified Consolidated First Amended Shareholder Derivative Complaint, ECF No. 47 (“Compl.”). The first motion was filed by Polycom, Inc. and five members of its Board of Directors, Betsy S. Atkins, John A. Kelley, D. Scott Mercer, William A. Owens, and Kevin T. Parker,¹ (collectively, “Polycom”). ECF No. 48 (“Polycom Mot.”). The second motion was filed by Polycom's former CEO and Defendant Andrew Miller. ECF No. 51 (“Miller Mot.”). The motions are fully briefed,² and appropriate for disposition without oral argument under Civil Local Rule 7–1(b). For the reasons set forth below, the motions are GRANTED IN PART and DENIED IN PART.

II. BACKGROUND

This is a shareholder derivative suit against Polycom, a San Jose-based provider of video and telecommunication systems, arising out of allegations of misconduct by Polycom's CEO, Andrew Miller. Miller resigned after an investigation by Polycom's Audit Committee, made up of Kelley, Mercer, and Parker, found problems with Miller's expense reimbursements.

During Miller's tenure as CEO, he allegedly claimed reimbursements for numerous inappropriate personal expenses. According to a confidential witness for Plaintiffs, this behavior was well-known within Polycom, although the parties disagree about the extent and import of any such knowledge. In any event, after an investigation, Miller and Polycom entered into a separation agreement. Under the separation agreement, Miller agreed to resign, release compensation and employment-related claims against Polycom, and provide continued assistance through a transition period in exchange for a severance package. Following Miller's resignation, Polycom stated in a press release that “[t]he amounts [of the inappropriate personal expenses] did not have a material impact on the Company's current or previously reported financial statements for any period, nor did they involve any other employees.” ECF No. 50 (“Rucker Decl.”) Ex. A (“Form 8–K”).³

Shortly thereafter, Plaintiffs filed derivative complaints alleging breaches of fiduciary duty, unjust enrichment, and corporate waste against Miller and the Director Defendants. In Plaintiffs' view, the Board made false statements (or allowed such statements to be made by others) about the adequacy of internal controls on expense reimbursement, failed to implement and apply Polycom's expense reimbursement policies, unjustifiably gave Miller a ‘golden parachute’ without adequately assessing his conduct, granted Miller a “unique position of power over the Company,” in which the directors were “beholden” to him, and repurchased stock at prices artificially inflated by misleading statements about internal controls and compliance. See Compl. ¶¶ 31, 107–08, 112, 127, 142–51, 169.

Prior to filing suit, Plaintiffs did not demand Polycom's Board pursue these claims directly on Polycom's behalf, arguing that doing so would have been futile. At the time the initial complaint was filed, Polycom's Board had five members, the Board Members. Four of those, Atkins, Kelley, Mercer, and Owens, have always been outside directors. The fifth, Parker, became interim-CEO after Miller's resignation.

Now Defendants move to dismiss, arguing that Plaintiffs' failure to make a presuit demand on the Board cannot be excused. In the alternative, they suggest that the complaint should be dismissed under Federal Rule of Civil Procedure 12(b)(6). Plaintiffs oppose.

III. LEGAL STANDARD

A. Derivative Suits Generally

Generally speaking, a corporation, not its shareholders, has the sole right to pursue litigation for injuries suffered by the corporation. See Potter v. Hughes, 546 F.3d 1051, 1058 (9th Cir.2008). A shareholder derivative suit is one of the exceptions to this general rule. “The derivative form of action permits an individual shareholder to bring ‘suit to enforce a corporate cause of action against officers, directors, and third parties.’ ” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991) (quoting Ross v. Bernhard, 396 U.S. 531, 534, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970) ) (emphasis in original).

“The theory in a derivative suit is that a corporation's board has been so faithless to investors' interests that investors must be allowed to pursue a claim in the corporation's name.” Robert F. Booth Tr. v. Crowley, 687 F.3d 314, 316–17 (7th Cir.2012). This is a serious remedy, and as a result, courts require a shareholder ‘demand’ the corporation bring the claim directly or show that demand should be excused because the board is biased or demand is otherwise futile. Kamen, 500 U.S. at 96, 111 S.Ct. 1711.

B. Pleading Standard Under Rule 23.1

Federal law requires that a shareholder derivative complaint describe “with particularity” “any effort by the plaintiff to obtain the desired action from the directors and ... the reasons for not obtaining the action or not making the effort.” Fed. R. Civ. P. 23.1(b)(3)(A)–(B). On a motion to dismiss under Rule 23.1 the Court must accept as true well-pleaded factual allegations in the complaint. In re Cendent Corp. Deriv. Action Litig., 189 F.R.D. 117, 127 (D.N.J.1999).

C. Demand Futility Under Delaware Law

Because Polycom is incorporated in Delaware, Delaware law supplies the standard for assessing whether the failure to make demand on the board can be excused. Kamen, 500 U.S. at 108–09, 111 S.Ct. 1711 ; see also In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 989–90 (9th Cir.1999), abrogated on other grounds, S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir.2008). The demand requirement is “designed to give a corporation the opportunity to rectify an alleged wrong without litigation, and to control any litigation which does arise.” Aronson v. Lewis, 473 A.2d 805, 809 (Del.1984), overruled in part on other grounds , Brehm v. Eisner, 746 A.2d 244 (Del.2000).

In order to demonstrate that demand would have been futile, there are two relevant tests. The first, the Aronson test, applies when plaintiffs challenge a board decision. In re Openwave Sys. Inc. S'holder Derivative Litig., 503 F.Supp.2d 1341, 1345 (N.D.Cal.2007). To satisfy the Aronson test, plaintiffs must show “under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent [, or] (2) the challenged transaction was otherwise the product of valid exercise of business judgment.” Aronson, 473 A.2d at 814. The Aronson test is disjunctive, so “[i]f a derivative plaintiff can demonstrate a reasonable doubt as to the first or second prong of the Aronson test, then he has demonstrated that demand would have been futile.” Seminaris v. Landa, 662 A.2d 1350, 1354 (Del.Ch.1995).

The second test, the Rales test, applies “where the board that would be considering the demand did not make a business decision which is being challenged....” Rales v. Blasband, 634 A.2d 927, 933 (Del.1993). Under those circumstances, the second prong of Aronson is inapplicable, and the plaintiff must plead particularized facts that there is a reasonable doubt that a board majority could exercise independent and disinterested business judgment in responding to a demand. See Rales v. Blasband, 634 A.2d 927, 934 (Del.1993).

Under both these tests, reasonable doubt is “akin to the concept that the stockholder has a ‘reasonable belief’ that the board lacks independence.” Grimes v. Donald, 673 A.2d 1207, 1217 n. 17 (Del.1996), overruled on other grounds, Brehm, 746 A.2d 244. The business judgment rule is the “presumption that directors making a business decision, not involving self-interest, act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation's best interest.” Grobow v. Perot, 539 A.2d 180, 187 (Del.1988), overruled in part on other grounds , Brehm, 746 A.2d 244.

IV. DISCUSSION

Plaintiffs make four claims. First, Plaintiffs claim that the board failed to adequately oversee Polycom's auditing and accounting controls. Second, Plaintiffs argue that Polycom issued false and misleading financial statements. Third, Plaintiffs believe the separation agreement the board executed with Miller constitutes corporate waste and accorded excessive benefits. Finally, Plaintiffs challenge Polycom's stock repurchases. While “no single factor ... may itself be dispositive in any particular case,” the Court must determine “whether the accumulation of all factors creates the reasonable doubt” that the board was independent and exercised independent and disinterested business judgment.

Plaintiffs' oversight and false and misleading statement claims are governed by the Rales test, while Plaintiffs' challenges to the separation agreement are governed by the Aronson test. Compare In re Accuray, Inc. S'holder Derivative Litig., 757 F.Supp.2d 919, 926–30 (N.D.Cal.2010) (applying the Rales test to oversight claims), with Zucker v. Andreessen, No. 6014–VCP, 2012 WL 2366448, at *6 (Del.Ch. June 21, 2012) (reviewing a severance agreement under the Aronson test). Because different tests apply to each claim, the Court examines each claim in isolation while remaining mindful of the requirement that the Court “determine whether the totality of Plaintiffs' allegations demonstrate a reasonable doubt about the Board's impartiality.” In re Bidz.com, Inc. Derivative Litig....